If the market is holding the "1970 script," and gold has just reenacted the "first major decline after the big surge from 1971 to 1973"

Ask AI · How do oil prices in US dollars influence gold’s safe-haven appeal?

With the escalation of tensions in the Middle East, oil prices and inflation expectations have once again become the market’s focus. Recently, energy stocks have been favored, while both equities and bonds have come under pressure. The market is beginning to worry that the “stagflation of the 1970s” might repeat. What is most surprising is gold: as a recognized safe-haven asset, gold prices have recently experienced a noticeable pullback. This appears to be because, under tightening market liquidity, investors have prioritized selling high-priced gold to cash out.

In a recent report, Huatai Securities’ Zhang Jiqiang team pointed out: “History can be referenced, but it will not simply repeat itself.” They divided the stagflation environment of the 1970s into three stages: first, speculation on “inflation”; then, a tug-of-war between “inflation” and “economic stagnation”; and finally, “economic stagnation” dominates, with inflation easing afterward. In other words, even if the market truly retraces the old path of the 1970s, the performance of various assets will not move in a one-way upward or downward trend. Investors should not expect that blindly “buying gold” can solve all problems.

Technical analyst Jordan Roy-Byrne offered a more provocative analogy: gold has “just replayed the 1971–1973 price pattern, including the first major decline after that surge.” In his review of the 1970s bull market, after peaking in 1973, gold rose about 7 times over the next 7 years, but along the way experienced “hard pullbacks” of 29%, 24%, 45%, and 20%.

Caitong Securities’ Xu Chenyi team reviewed asset performance in the 1970s and concluded more directly: throughout the decade, gold’s returns far outperformed, and it was the only major asset class that could still deliver positive real returns after adjusting for inflation. They also remind that holding gold is not an easy experience—during its long upward trend, gold prices would periodically suffer significant declines, often during periods when stocks rebounded and inflation temporarily eased.

Combining these perspectives, a more practical conclusion emerges: the key to whether the market will repeat the “1970s script” is not to put all bets on a single asset, but to focus on how long the oil shock will last, and how the US dollar trend and market liquidity will evolve. The recent short-term weakness in gold does not mean its investment value in a stagflation environment has vanished. On the contrary, it serves as a reminder: if the 1970s pattern truly repeats, investors must first adapt to the intense volatility of “sharp rise—sharp fall—then another rise.”

Why gold thrived in the 1970s: benefiting from the “dual main themes” of “monetary order change + energy shocks”

Caitong Securities segmented the 1970s and found that during several key periods, gold was almost always the best-performing major asset:

• During the “dissolution of the dollar and gold” phase (1966/01—1973/10), London spot gold increased by 178.4%.
• During the first oil crisis (1973/10—1974/03), gold rose another 76.5%, while the S&P 500 declined 13.2%.
• During the second oil crisis period (1978/11—1981/01), gold gained 161.9%.

If the cycle is extended (1966/01—1985/12), gold’s total increase reaches 829.1%. Caitong Securities emphasizes a key data point: after removing inflation, gold was the only asset that maintained positive real returns during this period, while stocks and bonds had negative real yields.

These figures clearly illustrate gold’s “winning streak” in the 1970s: it was not just a safe haven, but a comprehensive pricing response to high inflation, negative real interest rates, and shocks to monetary credit.

What the “first major decline after a big rally” looked like historically: gold’s pullbacks occurred when inflation expectations receded and stocks rebounded

Looking back at the 1970s, if you think gold only “rises in a straight line,” you are mistaken. Based on Caitong Securities’ review of the 1966–1985 period, using the “Merrill investment clock,” gold did not maintain an upward trend at every stage:

• Early surge: From October 1970 to August 1972 (economic recovery), gold rose 79.5%; then from August 1972 to December 1974 (stagflation), gold surged 178.9%, while the S&P 500 fell 38.3%.

• Typical pullback: However, from March 1975 to May 1976 (another economic recovery), gold experienced a significant decline of 29.2%; meanwhile, the S&P 500 actually increased 20.2%.

This period’s market performance can be summarized as: inflation expectations were fully priced in early on; then, as the economy stabilized and risk appetite recovered, a reversal occurred.

In other words, gold in the 1970s was not “always rising,” and in certain phases, it would give back part of its gains—especially when the market anticipated “stagflation was ending” or “policy was turning.”

Why did gold fall first this time? A strong dollar, crowded positioning, and market “cash-out demand”

Huatai Securities’ report notes that, despite recent market shocks, gold and silver—expected safe havens—led the declines. The core reasons are: the dollar’s strength, capital flowing into other assets, and gold’s prior gains making valuations high and trading crowded. Simply put, when the market urgently needs liquidity, gold becomes a target for selling to raise cash.

Bank of America Merrill Lynch’s fund flow data confirms this: in the week of March 7, gold experienced its largest weekly outflow since October 2025 (US$1.8 billion); in contrast, the energy sector saw the largest weekly inflow ever (US$7.0 billion). BofA Merrill Lynch warns that until the dollar’s trend becomes clearer, a sharp rebound in gold should not be expected. Currently, oil prices and the dollar have not shown clear reversal signals, and the S&P 500 has not yet fully adjusted.

This explains why many think “gold surged like in the early 1970s but then suddenly fell.” It’s not that gold’s long-term logic failed; rather, in the current macro context, the market is prioritizing selling more liquid assets, executing a “liquidity hierarchy.”

“Stagflation trading” needs to be viewed in stages: gold’s rhythm is embedded in three logical layers

Zhang Jiqiang’s team divides stagflation into three phases. From a gold perspective, this framework is more instructive:

1) First phase: trading “inflation”—gold may not be the strongest, and could even face pressure
Energy prices push inflation higher, central banks raise rates rapidly, and liquidity tightens. During this phase, commodities perform strongly overall, but gold may not lead—because rising real interest rates and a stronger dollar often suppress gold’s performance. This is also the macro backdrop for gold’s recent correction: it’s not that inflation has disappeared, but that “liquidity has become more expensive.”

2) Second phase: tug-of-war between inflation and recession—gold begins to reprice
The economy weakens, market expectations shift toward policy change, and real interest rates peak. In this stage, gold often begins to strengthen because the market shifts from “fighting inflation” to “fighting recession + policy mistakes.” This is often the start of a trend-driven rally in gold.

3) Third phase: recession dominates—the gold rally approaches its end
Inflation declines, central banks cut rates, and a bond bull market begins. At this point, gold’s logic weakens as systemic risks decline, and capital shifts toward risk assets or interest-rate assets.

In summary, gold is not simply an “asset benefiting from stagflation,” but one highly sensitive to “real interest rate turning points.”

If the market remains between the first and second phases, then gold’s volatility essentially reflects market anticipation of that turning point.

The key to this framework is the “sequence of turning points”: policy bottom—interest rate peak—market bottom—inflation peak—economic bottom. If the market is truly following the “1970s script,” it is currently oscillating between the first and second segments: worried about inflation reigniting, yet also concerned that liquidity is already squeezing risk assets.

Will the 2020s head toward stagflation or “inflation-driven prosperity”? For gold, it ultimately depends on the “oil price × US dollar” outlook

BofA Merrill Lynch strategist Michael Hartnett’s team’s view, while discussing macro paths, can be summarized more simply for gold:

Oil prices determine inflation’s potential height; the US dollar determines gold’s elasticity.

• Scenario 1: Short-term conflict, oil prices controlled (<$90)

Inflation pressures are limited, the dollar remains strong, and liquidity is not significantly easing.

Gold: mainly range-bound, difficult to sustain a trend

• Scenario 2: Escalating conflict, oil prices spike ($100–$120)

Inflation risks increase, policy becomes more reactive.

Gold: medium-term logic strengthens, but short-term may still be suppressed by the dollar

In short, gold does not simply rise with oil prices; it depends on whether oil prices push policy into out-of-control territory. Only when markets start doubting monetary policy’s effectiveness will gold enter its strongest phase.

Capital flows have already begun to reverse: what does that mean for gold?

Hartnett’s team highlights four “market bottom signals.” Interpreted from a gold perspective, they describe a typical process:

• Large-scale outflows from gold (already occurred)

Indicating it has completed the “liquidity withdrawal” phase

• Capital flowing into energy (happening now)

Indicating the market is still trading the “first inflation stage”

• Oil and dollar have not yet declined (not yet happening)

Meaning the downward pressure on gold remains

• Risk assets have not fully cleared (not yet happening)

Meaning safe-haven demand for gold has not fully returned

Therefore, gold’s current state can be summarized as: it has completed the first adjustment wave but has not yet met the macro conditions to drive another upward cycle.

The true lessons of the 1970s: gold is a core asset, but its pace is never smooth

Caitong Securities provided a detailed breakdown of industry, style, and country performance in the 1970s, which is especially important for understanding gold. Because if you only look at the outcome—long-term outperformance—you might draw an overly simplistic conclusion. The actual historical path was far more complex.

From the asset performance at that time, energy was always the “first driver” pushing inflation expectations higher. Meanwhile, stock markets experienced frequent and intense style rotations, with performance diverging across countries. In this macro context, gold was not the leading asset at every stage; instead, it functioned more like a “pricing main line” throughout the cycle.

Specifically, when inflation was just beginning to rise and markets were still trading growth and demand expansion, cyclical commodities like energy often led, and gold’s performance might not stand out. But when inflation remained high, monetary policy gradually lost its restraint, and markets began to doubt monetary credit, gold entered its most explosive phase. Then, as economic downside pressure became clear and inflation started to cool, capital shifted toward bonds and other rate assets, reducing gold’s relative advantage.

In other words, although gold was one of the most successful assets of the 1970s, its rally was not linear—it was embedded in the recurring rhythm of “inflation—policy—growth.” This also means that simply extrapolating “stagflation benefits gold” underestimates the inevitable volatility and drawdowns along the way.

Returning to today: gold’s correction more resembles history unfolding “step by step”

Applying these historical lessons to current markets yields a more explanatory view: if the market is indeed following the “1970s script,” then gold’s recent decline is not a negation of that scenario. Instead, it is the most typical—and also the easiest to overlook—part:

i.e., after a rapid surge, the “first major pullback” triggered by liquidity tightening and capital reallocation.

Currently, oil shocks are re-emerging, and inflation expectations are rising. At the same time, the dollar remains strong, and real interest rates are high, keeping overall liquidity tight. In this environment, gold is being sold first, not because its long-term logic is broken, but because it has already accumulated significant unrealized gains, making it highly liquid.

Therefore, rather than fixating on why gold is falling, it’s better to focus on the key variables that will determine its next trend: whether the oil shock persists and pushes inflation into an uncontrollable range; when the dollar peaks and real interest rates trend downward; and whether the market shifts from simple liquidity tightening to credit risk exposure.

Only when these conditions develop gradually will gold be able to shift from a “passive asset” to a core component of active market allocation.

Until then, a more realistic expectation is that gold will continue to oscillate with the rhythm of “rising—being cashed out—then rising again.” This reflects both the true history of the 1970s and the market normalcy investors may need to re-adapt to in this cycle.